Another Attack on Outrageous Bonuses

20 March 2009 at 10:08 pm 11 comments

| Mike Sykuta |

For the second time in a week, the Obama Administration attacked what it referred to as “outrageous” bonuses paid during a time of economic struggle for so many Americans. The announcement came as a reaction to Walmart’s announcement that the Arkansas-based retailer paid almost $1 billion in bonuses to its employees. Adding in profit-sharing, 401K contributions, and employee discounts, the total giveaway is closer to $2 billion, according to company officials.

The White House reacted strongly to such “corporate largess” less than a week after reports that bailout target AIG paid millions in bonuses to its employees. “At a time when so many Americans are losing their homes and unable to put food on their tables, it is unconscionable that a retailer that has benefited so much from consumers should be paying out such astronomical sums in bonuses to its employees. To make matters worse, we understand these bonuses were not even contractually obligated, as in the AIG case,” stated White House spokesman Robert Gibbs. “Obviously Walmart’s ‘Every Day Low Prices’ are not as low as they should be.” Congressional Democrats said they are considering legislation to tax Walmart employees’ bonus payments and to force the retailer to lower its prices further.

In case you weren’t sure, rest assured that the preceding paragraphs are satiric. However, if one follows the logic, why should it be any less outrageous that Walmart should be paying out $2 billion worth of bonuses and extra benefits to employees? After all, that money is every bit as much out of taxpayers’ pockets as the money doled out by the federal government to AIG and others. And yet there is no outrage, no moral indignation. Why not?

Maybe it’s because the Walmart bonus averages out to only $2,000 per employee. Maybe it’s because they don’t work on Wall Street. Maybe it’s because consumers got to chose whether to spend their money at Walmart, thereby providing the necessary funds for the bonuses. Maybe its because we think the AIG employees who got bonuses are personally responsible for the company’s misfortunes — though we have no information or basis for assuming those specific employees did anything wrong at all. Or perhaps its just the sort of class-based discrimination and double standard that typifies public debate.

Entry filed under: Bailout / Financial Crisis, Former Guest Bloggers.

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11 Comments Add your own

  • 1. Frank Gas  |  20 March 2009 at 11:14 pm

    It’s a smokescreen to provide cover for the 5 trillion. Nothing more.

  • 2. David  |  20 March 2009 at 11:57 pm

    In the WalMart case, the money came from tax payers’ pockets as a consequence of voluntary, arms-length transactions conducted in a marketplace in exchange for goods of presumably equal or greater value to the tax payers. In the AIG case the money came, or will come, from tax payers’ pockets as a consequence of compulsory taxes in exchange for the hope that …

    Do you really see the two circumstances as equivalent?

  • 3. Peter Klein  |  21 March 2009 at 4:33 am

    I agree with David that the source of funds matters. However, consider the following thought experiment. Suppose AIG had used the bailout money to increase wages for its lowest-paid employees, provide free on-site daycare, invest in diversity training, construct new energy-efficient offices with small carbon footprints, or other socially approved activities. Would the outrage from Washington, D.C. have been as great?

  • 4. Mike Sykuta  |  21 March 2009 at 6:55 am

    David, no I don’t believe the cases are equivalent largely for the reason you argue…it’s not the source of funds, but the mechanism by which the funds were obtained by or transmitted to the firms. But the legitimacy of the funding mechanism doesn’t necessarily transfer to the legitimacy of the employees’ compensation.

    Peter gets the gold star for inference. The reason people are upset about the one case is not simply that it is tax money…AIG is spending billions of dollars of tax money that isn’t drawing such ire from the general public (other than places like O&M). The reason is because of who is getting the money and how much the individuals are getting.

    But between the two of you, you make the larger point, which is what Peter argued here. Namely, if the government were not using tax dollars to “bailout” AIG, we wouldn’t have this problem to begin with. After all, who deserves the greater ire? The one who spends your money foolishly, or the one who gave it to him to spend?

  • 5. JK  |  21 March 2009 at 8:57 am

    There certainly would have been more efficient ways of going about this “bailout”. I’ve worked on probably around 400 bridge loan agreements in my short time associated with small time VC and hedge funds in the past, and I can’t think of one that didn’t include provisos that forbade debt reduction, bonus payout, and unnecesary capital expenditures.

    Likewise, I can’t think of one loan, bridge or otherwise, that didn’t have an earmark on profits that accompanied the charged interest. The more complicated ones balanced the needs of equity investment along with the needs of debt reduction in the case of new development, or increasing the market of the firm.

    Finally, I agree with Peter’s previous post, this would have been orderly in the backdrop of bankruptcy protection, and that does not necessarily imply the demise of the firm, or even negate its access to capital.

  • 6. Per Bylund  |  21 March 2009 at 11:19 am

    What I find particularly interesting is that the people criticizing the bonuses most vigorously are the ones profiting (heavily) from coercively extracting revenue while doing no productive work at all. Yes, the message may be important itself, but it loses much (all?) of its moral content when the speaker is worse than the people he points his fingers at.

    I fail to see how Obama and his apparatchiks, or the republican dittos for that matter, can credibly say anything about business leaders of corporations bailed out by the government not having a “right” to pay contractually set bonuses. And when they criticize fully private companies for voluntarily contracting bonuses for their managers…? After all, the people in Congress or the White House get all their money from the taxpayers’ pockets with no part whatsoever being either voluntary or profitable.

  • 7. David Hoopes  |  21 March 2009 at 11:06 pm

    It seems like there is mostly agreement here. But Mark really hits the nail on the head,

    “Who deserves the greater ire? The one who spends your money foolishly, or the one who gave it to him to spend?”

    Especially since the fools that gave the fools money are now pounding podiums in feigned outrage. Anyone remember Claude Raines in “Casablanca?”

    “I’m shocked, shocked to find that gambling is going on in here!”
    “Here are your winnings sir.”
    “Thank you”

    Seems a lot of others on the Web have thought of this with a few of our Democratic friends in mind.

  • 8. Jason  |  23 March 2009 at 9:53 am

    Why would anybody compare this to Walmart? Did Walmart employees bring the financial system to ruin?

    Forget the politicians. I think the better question is why aren’t you outraged?

  • 9. Jared M  |  23 March 2009 at 2:41 pm

    “Who deserves the greater ire? The one who spends your money foolishly, or the one who gave it to him to spend?”

    Excellent point. I believe giving blame to the latter is key. There will always be someone willing to spend your money foolishly, the idea is to not let them get their hands on it.

  • 10. Mike Sykuta  |  24 March 2009 at 10:52 am

    Jason, it seems you understand neither satiric analogy nor the point of the post and most of the follow up comments. There is outrage, but it is directed at the misuse of taxpayers money by Congress to so foolishly dole out bailouts 1) at all, and 2) with none of the duty of care one would normally expect from a lender (see JK’s comments).

  • 11. Michael E. Marotta  |  25 March 2009 at 9:23 pm

    The designation of WalMart’s customers as “taxpayers” is misapplied. While it is true that they happen to pay taxes that is not relevant to the model. Except as the law (occasionally) may protect a corporation as an artificial individual from exploitation by its officers on the same theory that it protects a child wage-earner from exploitation by its guardians, how the company distributes profits is internal only. Walmart earns its money. AIG did not — in fact, they clearly _failed_ to make money. The funds given to them by the government were extracted in the first place. Even if that could be justified (which it cannot) it still remains that the money taken would have been spent in other channels — at Walmart, rather than at AIG, if you want to see it that way.

    More to the point, marketing being as it is, Walmart’s customers pay relatively little in income tax (relatively much in sales tax) and the tax money for AIG is coming from the top of the earning scale where people are conscious of their investment decisiions. Thus, those people were robbed of their hard-earned money so that it could be given specificially to a firm they already chose _not_ to invest with.

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